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Az Aceable Agent 2nd Half > Title > Flashcards

Flashcards in Title Deck (21)
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1
Q

First off, let me reiterate: a title is not a document, nor is it a piece of paper. It’s not something you can physically hold! (That would be the deed.) Instead, the term title refers to an abstract concept. It includes someone’s ownership rights to a specific piece of real property. So, if you hold the title to a property, you have ownership rights to the property.

Legal Title
Earlier in the course, you learned that title, or legal title, refers to the complete legal ownership of real property and the bundle of rights associated with it.

But there is another kind of title: equitable title.

Equitable Title
Equitable title is an ownership interest created by a financial investment in a property by either a lienholder or buyer. So while you as the property owner may hold legal title to the property, your lender is said to hold the equitable title.

Title Issues
The reason we are discussing title in this chapter, Anthony, is because an owner’s title might be in bad shape. 😕 The owner might have a laundry list of liens on the property, from unpaid taxes to an unpaid contractor. There might even be a dispute about who actually owns the property.

A seller might not even know about all the title issues that their property has. They might in good faith try to sell their property without disclosing any of the title issues.

If a buyer and lender were to just trust the seller that the property is free of encumbrances, they could be in for a rude awakening once that title transfers. Luckily, there are measures in place to prevent a situation like that. A typical real estate transaction will involve an extensive examination into the current state of a title.

The most basic question about a title is: is it marketable? What does that mean? Let’s talk about it.

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Title

2
Q

A marketable title is one that is:

Free from serious defect

Free from legal exposure

Reasonably thought to be marketable should the buyer become a seller at some point in the future

To sum it up, a marketable title is a title that is free from significant encumbrances or defects (such as liens) that might otherwise prevent a purchaser from enjoying or eventually selling the property.

Not Required
While it is expected that a seller has a marketable title to… well… market their property, it’s not a requirement. But it is preferred because a title containing defects can limit or restrict ownership, so a buyer really needs to know the status of the title before accepting the deed. Concerns arising after that point usually require a legal course of action to remedy.

Magnifying glass on blue wooden background.

Title Search
So how are we to know if a title is marketable? Do a title search! This is a job for a title company.

A title search is a thorough examination of available public records in the county to determine who has rights to the property and whether any defects exist in the chain of title (more on that in a second).

In a title search, the records of the conveyances of ownership are examined, beginning with the present-day owner and going back in time — potentially to its origin.

State statutes ultimately determine the minimum required length of search time to be covered but it falls between 40 and 60 years.

What a Title Search Includes
A title search includes the examination of many public records, including:

Wills

Judicial proceedings

Tax records

Special assessments

Recorded liens

Encumbrances that may affect title

As you can see, a title search can be a pretty exhaustive thing. And oftentimes these records are stored in a number of ways — by the name of the buyer, the name of owner, the street address, lot number, etc.

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Marketable Title

3
Q

Let’s talk about a few things that make a title marketable (or not so marketable) that will likely surface during a title search.

Chain of Title
A title search will help to identify the chain of title.

The chain of title is the entire chronological record of a property’s ownership… the genealogy of real estate, you might say.

A search of the grantor-grantee indexes can reveal a complete line of fee title owners, starting with the present-day owner and going backward to the original grant — linking each owner to the next in a recorded chain.

The process of combing through these records, trying to find any claims or interests against a property, is called adversing the title.

Scenario: Chain of Title
Angela Jeter owns a three-story red brick home out in the country. She sells her home in 1923 to Natalie Barbus, a woman who lives in the property until she dies in 1975. In her will, she designates Eden Stober, her granddaughter, as the beneficiary, so the property passes to Eden. Eden lives in the property for about 30 years until she decides to relocate to a more urban area. She sells to Asher Doob and uses a quitclaim deed in order to correct an error in the property title.

All of this information and history should be represented in the chain of title. Take a look at the image below to see what that chain of title might look like.

Chain of title from Angela Jeter to Natalie Barbus to Eden Stober to Asher Doob with dates and conveyance details.

Image description

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Marketability: Chain of Title

4
Q

If there is a gap in the chain of title, the chain is said to be broken. A broken chain of title results in a cloud on the title. ⛈

To remove this cloud, an owner may need to initiate a suit to quiet title. This would serve as a kind of lawsuit against anyone who has a claim on the land. If the property owner wins the suit to quiet title, no further challenges to the title can be brought.

In short, a suit to quiet title clears the title record of any unrecorded claims.

Where Clouds Come From
One kind of cloud on a title that can surface while going through the chain of title is an unreleased deed of trust. Always be on the lookout for issues that could be problematic during title transfer, such as:

Fraud

Liens

Inheritance issues

Foreclosure proceedings

A woman standing next to home with the title clouds of fraud, liens, probate issues, and foreclosure proceedings hovering all around.

Scenario: Mary and Caitlan
Let’s say that Mary dies and her estate was not probated (the validity of the will was not established), but Mary’s niece Caitlan, who served as her in-home caretaker during her final years, takes the deed and assumes ownership of the property. If Caitlan later wishes to sell the property, she may need to locate others who should have been a part of the inheritance. Any other relatives may have to “sign off” on the property indicating that they did not expect anything from the deceased’s estate and then the sale can move forward. Caitlan’s agent will want to ask her the right questions to surface any potential clouds on the title, including possible inheritance disputes that may complicate the transaction. In this situation, it would be wise for Caitlan to consult an attorney before proceeding with the sale.

Fraud
An additional cloud on the title could be created by some type of fraud. For example, there are cases in which a land developer sells the same tract of property to more than one person. This issue can be resolved, but usually to only one person’s satisfaction.

Color of Title
A cloud on the title isn’t the only thing that could go wrong in a title transfer. There’s also the issue of color of title.

Color of title refers to a title transfer that is defective in a way that is unknown to the new owner. The title might appear valid, but it is actually hiding a defective title. A color of title situation could spell very serious problems for a new owner.

For example, another party that has claim to the title may be able to pursue adverse possession… and they may win.

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Marketability: Cloud on the Title

5
Q

When the attorney or title company performs a title search they analyze the chain of title, clouds, and other things that affect a title’s marketability. The result is an abstract of title. In general, abstract of title isn’t really used in Arizona (still, it’s good to know about!).

As opposed to a thorough and exhaustive chain of title, an abstract of title is an abbreviated history of a property. It includes info on any transfers, grants, wills, conveyances, liens, or encumbrances. It’s a report detailing what was discovered in the title search. The person responsible for preparing this report is called an abstractor.

The Abstractor
The abstractor searches the public record and summarizes the events that affected the title throughout its history, from the original grant (if possible) to the present day.

All recorded instruments, liens, and encumbrances are included — noting their current status — in chronological order. A bibliography is attached to the report to reflect the scope of the research done to create the report.

Take Note
It’s important to note that abstractors do not give opinions concerning the condition of the title. The abstractor is merely responsible for writing the abstract of title. After that, an attorney will look over the abstract of title and deliver their opinion of the title’s condition and marketability.

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Abstract of Title

6
Q

In order to prove title, as well as prevent all manner of title defects, there needs to be evidence of title. Official evidence of title is constructive or actual notice of real property ownership, such as:

An opinion of title

A certificate of title

A Torrens certificate

Title insurance

Let’s learn more about each of these wonderful evidences of title. First up: opinion of title.

Opinion of Title
A prospective borrower or buyer can use an opinion of title as evidence of title. This is the official opinion of an attorney regarding the condition of a property’s title. The opinion of title is created by searching title records.

Certificate of Title
After performing a title search, the attorney will prepare a certificate of title, which is a document detailing the chain of title and offering an opinion on the marketability of the seller’s title. Think of it as a written certificate of the attorney’s opinion of title.

The certificate of title is one method sometimes used to prove ownership but it is important to keep in mind that it does not always guarantee ownership.

Similar to an abstract of title, it certifies the title condition based on information present in public records. However, hidden defects may not be detected, and unrecorded liens will not turn up in a search of public records. A certificate does NOT offer defense against these unknown defects.

Ya never know when there’s a defect lurking around the corner, Anthony.

Torrens Certificate
The Torrens system is a recording system used in some states in which the state holds all records of land and title ownership, evidenced by a certificate of title. The Torrens system is not used in Arizona.

Basically, with the Torrens system, the deed is registered directly on the certificate of title itself. It is only after the deed is registered on the certificate of title that the title passes to the new owner. After that, a Torrens certificate is issued to the new owner.

If a state uses it, a Torrens certificate is the absolute BEST form of title evidence. Because in a Torrens system, the state maintains the register of land, a Torrens certificate is basically the supreme, unassailable evidence of ownership. Though it is the best evidence of title, the Torrens system always exists in tandem with other recording procedures. This is because each state and area uses the system differently. For example:

The Torrens system is widely used in Minneapolis but much less often in the rest of the state of Minnesota.

The whole state of Hawaii uses the Torrens system, but typically only for developers or owners of larger tracts of land.

In any state that uses the system, one house could be registered with the Torrens system, and the house next door might use a different registration.

Even if Arizona doesn’t use the Torrens system, it’s important to know about because it may still come up in your practice. And it may be on the exam!

Torrens History
The Torrens system was invented by Sir Robert Torrens (people love naming things after themselves, don’t they?) who was British but working in Australia during the 1800s. He noticed that British ships used for sailing were registered succinctly, in a way that was easy to use. There was an official ship registry that had the records for every ship: the records included the ship’s name, owner, debts associated with the ship, and everything in between.

So Sir Robert Torrens decided to rock the boat and take the ship system over to land title registration. And here we are, Anthony.

Torrens Prevents Adverse Possession
Real property registered in the Torrens system cannot be lost to adverse possession. That’s how powerful a Torrens certificate is!

If a Torrens certificate cannot be obtained for a property, then title insurance serves as the second-best evidence of title. There’s no shame in second place, title insurance! Enjoy that silver medal! 🥈

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Evidence of Title

7
Q

Title insurance, also known as a title policy or title insurance policy, is a policy that protects lenders from certain financial losses due to title issues, such as defects, encumbrances, and liens. It’s also possible for homebuyers to purchase a title insurance policy, but the required policy will be for the lender.

Instead of being recurring like other insurance policies, title insurance is non-recurring and paid for up-front in one lump sum.

Remember: Unless the Torrens system is used, a property that has a title insurance policy is often accepted as the best evidence of marketable title. In fact, title insurance is the go-to form of evidence of title in Arizona. Way to go, title insurance! 👍

What It Insures
In contrast to other types of insurance that protect against events that may happen in the future, a title policy insures against problems that occurred before the time of purchase but are discovered after closing.

Buying Title Insurance
Buyers may choose any title agent they want. They don’t have to use the company that the real estate agent or lender recommends.

As always, the buyer should not use an agent who is unlicensed. If title insurance is bought from an unlicensed company, any claims the buyer might have could go unpaid.

Title Commitment
Before issuing a title policy, a title company will perform an examination of public records. Based on this review, the company will decide whether to insure the title. Usually, a preliminary report or title commitment is issued. The title commitment states the terms and conditions on which the actual policy will be issued. The document includes:

The name of the insured party

Legal description of the property

The estate or interest covered

A schedule of expectations including any found encumbrances and defects and any known unrecorded defects

Any conditions or stipulations under which the policy is issued

Evidence of Title, Ranked
Here are the ways to prove title, in order of quality.

Chart ranking evidence of title by security: Torrens system 1st, title insurance 2nd, and opinion/certificate of title 3rd.

Image description

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Title Insurance

8
Q

The American Land Title Association (ALTA) is a group of title companies across the U.S. that joined together to create some standardized forms for title commitments. This helps to ensure that across the country, homebuyers are getting the same thing when they purchase title insurance. Of course, every property’s title insurance coverage will be slightly different due to the quirks of the property and the area, but generally, a title commitment has four sections, called schedules.

Schedule A
Schedule A contains the details of the transaction: the name of the buyer, the legal description, the types of policies being purchased, the type of interest being purchased (like fee simple, for example), etc. Agents should review this section and make sure there aren’t any mistakes.

Schedule B
Schedule B includes the exceptions to the policy. There are standard exceptions, that all policies don’t cover, and then specific exceptions to the property in question.

Standard Exceptions
There are four standard exceptions to a title policy:

The rights of people currently in possession of the property (for example, the rights of a tenant with a valid lease)

Any encroachments, encumbrances, or boundary issues that an accurate survey would show

Easements that aren’t recorded in the public record

Mechanic’s liens or tax liens that aren’t shown in the public record

Specific Exceptions
Specific exceptions would be things like easements, liens, or deed restrictions that the buyer and title company know about. Obviously, these will be different for every property (and many won’t have any!).

Schedule C
Schedule C is known as the “requirements” section. It’s everything that the seller needs to clear up before the title company is willing to give the go ahead for closing. This could be things like mechanic’s liens or tax liens that need to be paid before the title is transferred.

Schedule D
Schedule D is mostly disclosures. It will disclose anyone who gets a share of the title premiums (for example, the underwriters).

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Standard Title Commitment

9
Q

Title companies issue several types of insurance policies. The two most common are:

Owner’s title insurance policy

Lender’s title insurance policy (sometimes called mortgagee’s title policy)

Owner’s Title Policy
An owner’s policy protects a new owner (the buyer) from claims against the property that existed before it was purchased but are discovered after closing. This type of policy remains effective for as long as the owner or their heirs own the property.

The policy covers the purchase price of the house and can be negotiated within the contract, meaning that the seller or buyer could cover the cost of the owner’s policy.

Lender’s Title Policy
A lender’s title policy will protect the lender from unknown existing defects on the title. Typically, this policy is part of the lender’s loan package (paid for by the buyer) and covers the balance of the mortgage. A lender’s title policy assures a lender that it has a valid first lien (or in some cases second lien) against the property.

Should a claim arise that voids the title, the policy will repay the mortgage, protecting the lender from loss. Reimbursement on a lender’s title policy is limited to the amount remaining on the loan balance, meaning that coverage decreases as the buyer’s loan is paid off.

Everyone’s gotta protect themselves, Anthony.

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Title Insurance: Types of Policies

10
Q

I bet you’re probably wondering, “Exactly what does a title policy cover?”

Good question! The particular defects that a title company insures against will depend on policy type and any endorsements that are requested by the lender. However, coverage can generally be broken down into two main categories: standard coverage and extended coverage.

Standard Coverage
A standard coverage owner’s policy usually insures against the following:

Forged documents

Incompetent grantors

Deeds not signed by a necessary party

Improperly recorded deed

Liens and encumbrances recorded but not disclosed

Incorrect legal descriptions

What DOESN’T a Title Policy Cover?
We already talked about the standard and specific exceptions to coverage that show up in Schedule B. But keep in mind that title insurance doesn’t insure against fire, flood, theft, or any other type of property damage or loss. That’s the job of a homeowner’s insurance policy (more on that in a moment).

So it’s probably best if you put the flamethrower away, Anthony, because a title policy won’t help you there.

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Title Policy Coverage

11
Q

If a lender requires it, a borrower will need to have extended coverage.

As the name suggests, extended coverage provides protections that extend beyond what is insured under a standard coverage policy.

Lenders often require that the lender’s policies have extended coverage. But owners have the option to extend the coverage on their owner’s policies as well.

An owner’s policy with extended coverage insures against items such as:

Certain unrecorded liens not known by the policyholder

Off-record easements or adverse possession claims

Not having access to the property

Discrepancies in the boundaries of the property, or certain kinds of encroachments

Defects discoverable through a property inspection and examination of survey

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Extended Coverage

12
Q

Hopefully, a homeowner never has to use their title insurance. Unfortunately, stuff happens in this life, and sometimes a title issue pops up after closing that requires insurance to deal with.

Subrogation
By the time a title insurance claim comes around, your job will already be done and your commission check collecting interest in your sensible high-interest savings account (or, ahem, spent on extremely necessary online shopping purchases).

However, you should understand the concept of subrogation anyway. Subrogation is the substitution of one person for another in a lawful claim. So in the case of title insurance, once the title insurer pays the homeowner to remedy the situation, subrogation gives the insurance company the right to get their money from whoever owes it to the homeowner.

Even though the homeowner is the one who was wronged by whatever the title issue is, because the insurance company paid the claim, they’re now the ones who can pursue a legal remedy.

So yeah, think twice if you’re going to commit title fraud, because you’ll likely have a scary insurance company coming for you. (Also because it’s wrong.)

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Claims

13
Q

You already know how important recording is. Let’s take a second to look at what recording means for titles.

Recording Acts
You may recall from an earlier chapter that recording is the process of placing documents into the public record per state law. Documents affecting any interest, right, or title to a parcel of real estate must be recorded as a public notice with the county recorder’s office.

Title Records
All of these recorded documents live in the title records, which are public records that catalog all real estate information in the county, including:

Owners’ names

Liens

Easements

Encumbrances

There are two reasons this is done:

Those wishing to discover existing interests in the property can know where and how to access that information

Priority of legal interests tend to be established by virtue of a first-in-time-first-in-line convention

Exceptions
Exceptions to this priority principle include property tax liens and special assessments.

Additionally, quitclaim deeds are not subject to the chronological priority view since they convey only the interest of the grantor at the time of conveyance — which may be no interest at all.

To Sum It Up
Property information is documented, saved, and recorded in the title records.

Recording provides public notice and helps protect both buyers and lienholders.

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Recording

14
Q

Giving notice of title is the duty of a real estate owner to make their claim or interest on a subject property publicly accessible.

Types of Notice
You might remember learning that notice breaks down into:

Constructive notice

Actual notice

We talked about these types of notices before, but they’re important to the concept of transferring title.

Constructive Notice
The concept of constructive notice presumes a diligent individual can search the public record to gain a sufficient understanding of the property, including those with present and past interests in that property.

Actual Notice
Actual notice is direct or first-hand knowledge. It can include:

Reading a deed

Searching title records

Physically visiting a property to see who currently has possession

If you show up to a house and spot a person in possession of a property, that can serve as actual notice that the property is currently in someone’s possession.

Constructive vs. Actual
Let’s compare and contrast.

Venn diagram listing similarities and differences between constructive notice and actual notice.

Image description

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Giving Notice

15
Q

It helps to think of actual notice as knowledge that you have obtained firsthand, either as a result of your own experience or communication you have received with your own ears or eyeballs. 👂👀

Constructive notice, on the other hand, is more of a legal notice, accessible through public records. That’s why it’s sometimes referred to as legal notice (go figure). Let’s consider a couple of examples.

Scenario: Property Owner Josh
Property owner Josh records his deed, making it available through county records. Josh has just given constructive notice of title to the general public.

Potential buyer Audrey sees a “For Sale” sign on Josh’s lawn. She looks up public records to find out more information about the property. She has now seen, with her own eyes, the ownership information – meaning that she has received actual notice.

Alternatively, if Audrey didn’t want to go through all that trouble, she could have just visited the property to see if anyone was currently in possession. That’s also actual notice.

It’s on You Now
Once the property owner has fulfilled their obligation to give constructive notice through the public record, the onus shifts to the prospective buyer and their lender to do their due diligence and examine the public record and/or make a visual inspection in order to gather the information they need to commit to the purchase. Generally, this is done with the title search.

This is sometimes referred to as inquiry notice: information a curious person could discover by asking questions or inquiring.

EXAMPLE
You notice a service road cutting across the property you are about to close on. As far as you know, there are no easements, encumbrances, or the like, but this is probably something you should ask questions about – the law expects you to ask questions, in fact!

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Constructive Notice vs. Actual Notice

16
Q

Lastly – where exactly do all of these records call home?

As we’ve mentioned before, in Arizona, recorded deeds and other documents live at the county recorder’s office.

Our Good Friend the Internet
With all of these phones and gadgets and electronic inventions, digital recording is becoming a lot more popular than old-fashioned paper recording. The Mortgage Electronic Registration System (MERS) allows mortgages to be recorded electronically and serves as a national organization method.

Several hands holding internet devices such as cell phone and tablets.

Indexes
Documents are recorded in chronological order, which is often important, as chronology often establishes priority. But if you’re looking for a record connected to a specific property, and if you don’t know when that record was filed, chronological documentation wouldn’t be very helpful. That’s why there are several ways to index records, the most common of which are the grantor and grantee indexes.

As you may have guessed, grantor and grantee indexes depend on the grantor and grantee.

In grantor indexes, grantors are alphabetized each calendar year and listed next to their corresponding grantee.

In grantee indexes, grantees are alphabetized each calendar year and listed next to their corresponding grantors.

Indexes may also be organized according to a mortgage or judgment, depending on the county or state. These indexes might look like one of the following:

Mortgagee or mortgagor index

Judgment rolls

Lis pendens index

Lis pendens means pending lawsuits, so a lis pendens index documents all those pending lawsuits and things that may cloud a title.

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Where Records Live

17
Q

Now that we have title and title insurance under our collective belt, let’s take a moment to talk about some other kinds of insurance homeowners need. Remember a few screens ago when we said that title insurance doesn’t cover things like fire damage? Well, that’s what homeowners insurance is for.

It’s Required
Pretty much every lender will require a buyer to prove that they have enough insurance to pay back their loan if something happens to the property. The general name for insurance that covers loss or damage to a property is hazard insurance. There are several different kinds, with different amounts of coverage.

Loss Payee
A lender will become what’s known as a loss payee on a property owner’s insurance. What that means is that if a property is damaged, the lender will be offered money by the insurance agency first, even though the policy is in the homeowner’s name. The loss payee has priority pay-back status, in this case because the homeowner owes them money.

When a home is damaged, sometimes a lender will opt to allow the homeowner to use all of the insurance money to repair the home (and keep the mortgage in place). If the damage is extensive, the lender may decide to take the money they’re owed by the borrower from the insurance company. The homeowner then gets whatever money is left from the insurance company. This is one reason why homeowners should consider getting more insurance than the minimum coverage their lender requires!

Monoline vs. Multiline
Hazard insurance can be monoline or multiline. Monoline insurance only covers one area of risk, while multiline covers several areas at once. For example, monoline insurance might just cover any damage to the building, while multiline insurance could cover damage to the building and any personal liability. Most homeowners will get multiline insurance.

Dwelling Insurance
Dwelling insurance is a kind of monoline insurance for residential properties. It usually covers damage from fire, lightning, and internal explosion. Property owners can purchase extended coverage if they want to insure the property against other kinds of damage (known in the insurance world as perils).

Homeowners Insurance
Homeowners insurance is a multiline insurance for residential property. Typically, it includes property damage coverage (like you’d get with dwelling insurance), plus theft protection and liability coverage. Liability coverage protects a homeowner if someone is injured on their property and sues them.

Homeowners insurance is the most common kind of insurance for homeowners (it’s right there in the name, after all!). There is a wide range of policies available with all different levels of coverage, from super basic low-cost policies to extended policies that cover all kinds of perils and hazards. There’s even a special kind of homeowners insurance for people who own condos!

We won’t get into the specifics here but generally, a lender will have a minimum, required amount of insurance coverage a homeowner has to get to qualify for the loan. Many homeowners choose to get more coverage to protect their investment.

Commercial Property Insurance
Commercial properties have a different kind of insurance, but it’s basically the same idea. Most kinds of disaster are covered (fire, sinkhole, riot, airplane damage, volcano [!]), but extended coverage is also available. Note that floods are never covered by standard insurance. More on that later.

Coinsurance Clause
Commercial property insurance often comes with a coinsurance clause that offers a discount in premiums (the amount the property owner pays every month) if the property owner covers at least 80% of the value of the property. If they choose not to get that level of coverage, the insurance company may penalize the property owner when reimbursing them for a partially-damaged property.

Additional Insured
Sometimes investment properties — whether they’re residential or commercial — will have what’s called an additional insured. That is someone who is covered by the liability protections in an insurance policy who is not the policyholder. For example, a property management company might be added as an additional insured on the policy held by the owner of the property they’re managing. That way, if something happens in the building and a tenant sues, the property management company is covered by the property owner’s insurance.

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Homeowners Insurance

18
Q

Underwriting is the process the insurance company uses to determine what kind of coverage they’re willing to offer (and how much they will require a property owner to pay for it). Underwriters will look at both the property itself and the property owner to decide what risk they’re comfortable taking. To do this, they’ll use credit reports and something called a CLUE report.

CLUE Reports
CLUE stands for Comprehensive Loss Underwriting Exchange. It’s a database maintained by insurance companies about every claim made on a property in the last five years.

A CLUE report provides dates of claims, insurance company or companies involved, the type of policy, whether the loss was related to a named catastrophe (hurricane, etc.), location of the loss (on or off the property), the amount paid, and the cause of the loss.

Claims History
A property owner with two or more claims in the past three years might have trouble finding an insurance company willing to insure them. If they do, they’ll probably pay a higher premium. That stinks for a homeowner who has had a run of bad luck! But it’s something homeowners should keep in mind when they’re debating whether or not to file an insurance claim on something that has happened in their home.

Seller’s Claims
In fact, even claims made by someone else on a property can affect a future owner’s ability to insure the property. If the seller has made several claims in recent history, the buyer could find that they’re paying higher premiums than they want to. Remember that insurance is part of PITI, the homeowner’s monthly mortgage payment. A high insurance premium could make a home unaffordable. Buyers should try to get access to a property’s CLUE report during the inspection period (and show it to their insurer) to avoid any unpleasant surprises.

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Underwriting

19
Q

I told you a few screens ago that floods are never covered by standard insurance. Flood insurance is a whole separate thing, and property owners in flood zones have to purchase a separate policy to cover flooding. (Keep in mind we’re talking about weather-related floods here. Floods from bursting pipes are likely to be covered by homeowners insurance.)

The NFIP
Most flood insurance is sold by the National Flood Insurance Program, or NFIP. The NFIP is a federal insurance program managed by FEMA (the Federal Emergency Management Administration). Even private flood insurance is often backed by the NFIP. They’re the big name in flooding.

Flood Maps
The NFIP creates what are called flood maps: maps that show the likelihood that an area will be flooded.

There are four basic risk categories on the flood map.

Zone V is a high-risk coastal area. Zone V properties are required to carry flood insurance.

Zone A properties are also high-risk properties, and are inside what’s called the 100-year flood plain. That means there’s a 1% chance or higher the area will flood each year. We have been seeing more than our share of 100-year floods in the last few years, and many of these maps are being rewritten. Zone A properties are required to have flood insurance.

Zones B, C, and X are properties either in the 500-year flood plain or outside of a flood plain altogether. They’re considered low-risk for flooding and aren’t required to carry flood insurance.

Zone D designations haven’t been studied for flood vulnerability. They’re not required to have flood insurance.

But even though properties in Zones B, C, D, and X aren’t required to have flood insurance, according to FEMA statistics, 20% of flood claims come from properties outside of high-risk areas.

Elevation Certificate
An elevation certificate is an official form used by the NFIP. It documents a property’s location, flood zone, building characteristics, and the elevation of the lowest floor. It essentially assesses a property’s risk of flooding based on where it is and how it’s built. Homeowners buying flood insurance from the NFIP will probably be required to have one.

Do You Need Flood Insurance?
A lot of Arizona is located in a floodplain. As you learned a moment ago, depending on a property’s flood zone, the homeowner may be required to get flood insurance. As our weather becomes more unpredictable, flooding is a major risk for many homeowners. If a client’s lender doesn’t require them to get flood insurance, make sure you talk to them about assessing the risks of flooding anyway. A lot of people don’t realize that floods aren’t covered by their normal insurance. Flooding is incredibly damaging to a property — better safe than sorry! But ultimately, the decision lies with the homeowner.

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Flood Insurance

20
Q

What Is a Home Warranty?
A home warranty is a product offered by a company in which they maintain, repair, or replace any applicable component of a home for a specified period of time. This usually applies to major home appliances, electrical and plumbing systems, and the heating and air conditioning systems of a residence. Coverage differs from warranty to warranty. The typical term of coverage is one year.

Who Provides Home Warranties?
For new buildings, warranties are often provided by the builder. Otherwise, warranties can be purchased from third-party warranty companies. Often, the seller pays for the warranty.

Some homeowners purchase additional coverage from third-party warranty companies to supplement the builder’s coverage. Insurance companies, and even some residential real estate brokerages, sell home warranties. They’re typically offered to the buyer or seller of an existing home at the time of the sale of the property.

How Do Home Warranties Work?
Typically, the home’s appliances and systems should be in good working condition before the home warranty is purchased. A single, annual fee is paid. Then, for as long as the warranty is in effect, covered repairs and replacements will be taken care of by licensed professionals.

As long as the problem is covered by the warranty, the homeowner can get it fixed by paying a comparatively small service fee rather than shelling out for full-price parts and labor. 🛠

Transfer of a Home Warranty
In the event of a home’s resale, an unexpired warranty is transferred to the new buyer. If the policy has expired, a new home warranty policy can be purchased. The seller can buy a policy prior to the sale and transfer it to the buyer, or the buyer can purchase it for themselves. This is all negotiable.

Benefits of a Home Warranty
Home warranties can offer peace of mind. It’s hard to know if or when a major appliance or system in the home will break down. And if they do have an issue, it will probably be a major (and majorly expensive) inconvenience.

Real estate agents generally like home warranties. If a seller offers one, the property could be more attractive to buyers. Even buyers who don’t like paying for warranties are likely to appreciate getting a free one.

And if an expensive appliance should break down shortly after closing, the home warranty would likely take care of the problem. This prevents the buyer from being unhappy with their purchase or their agent.

Educating Buyers on Warranties
As an agent, you’ll be expected to educate the buyer on home warranties. The buyer should understand that:

Many different companies offer warranties.

Coverage and exclusions may differ from one company to another.

It’s the buyer’s responsibility to review and choose the coverage.

It’s also crucial that you do not overstate the coverage provided by a home warranty. Make yourself aware of the limitations and exclusions of the warranty in question, or you could face liability.

Give ‘Em Choices
Your client will likely ask you which home warranty provider you recommend. You should provide information and choices rather than steer your clients toward one particular company.

Presenting clients with a list of options is for the protection of both the consumer and the licensee. Real estate professionals have gotten into legal trouble by receiving “kickbacks” from service providers for referring clients to those providers in exchange for a referral fee. As a result, agents would recommend that their clients use that service provider to the exclusion of other providers. This is bad for the consumer because it means that agents are acting in their own best interest, not in the consumer’s.

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Home Warranties

21
Q

Now you know a little more about how title is transferred from one owner to the next!

Key Terms
Here are the key terms you learned in this chapter:

abstract of title
an abbreviated history of a property, including information on any transfers, grants, wills, conveyances, liens, and encumbrances

certificate of title
a document prepared by a title attorney detailing the chain of title and offering an opinion on the marketability of the seller’s title

chain of title
the entire chronological record of a property’s ownership

color of title
a title transfer that is defective in a way that is unknown to the new owner

evidence of title
constructive or actual notice of real property ownership

marketable title
a title that is free from significant encumbrances or defects that might otherwise prevent a purchaser from enjoying or eventually selling the property

notice of title
the duty of a real estate owner to make their claim or interest on a subject property publicly accessible

opinion of title
the official opinion of an attorney regarding the condition of a property’s title

title insurance
a policy that protects homeowners (and likewise, lenders) from certain financial losses due to title issues, such as defects, encumbrances, and liens

Torrens system
a recording system used in some states in which the state holds all records of land and title ownership, evidenced by a certificate of title

Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.

Marketable Title
A marketable title is one that is:

Free from serious defect

Free from legal exposure

Reasonably thought to be marketable should the buyer become a seller at some point in the future

Evidence of Title
Here is a ranking of the ways to show evidence of title, from best to worst. Remember that Arizona generally uses title insurance.

Chart ranking evidence of title in order of security with Torrens system first, title insurance second, and opinion of title/certificate of title third.

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Title Insurance: Types of Policies
Title companies issue several types of insurance policies. The two most common are:

Owner’s title insurance policy: protects the buyer, is optional

Lender’s title insurance policy (sometimes called mortgagee’s title policy): protects the lender, is mandatory

Title Commitment
After a title company does a title search, they issue a title commitment. Usually it is in four parts, Schedules A, B, C, and D. Schedule B has the exceptions.

The title commitment states the terms and conditions on which the actual policy will be issued. The document includes:

The name of the insured party

Legal description of the property

The estate or interest covered

A schedule of expectations including any found encumbrances and defects and any known unrecorded defects

Any conditions or stipulations under which the policy is issued

Recording
Property information is documented, saved, and recorded in the title records.

Recording provides public notice and helps protect both buyers and lienholders.

Notice of Title
The two kinds of notice of title are:

Constructive notice: a diligent individual can search the public record to gain a sufficient understanding of the property, including those with present and past interests in that property

Actual notice: direct or first-hand knowledge

Homeowners Insurance
Homeowners insurance is required by most lenders. It can be monoline (only protects against one thing) or multiline (protects against several things). Dwelling insurance is monoline, while homeowners insurance is multiline.

Underwriters determine what coverage insurance companies will offer (and what it will cost) using credit reports and CLUE reports. Too many claims can keep a property from being insurable.

Flood Insurance
Flood insurance is a separate kind of insurance usually sold by the NFIP. Homeowners will likely need an elevation certificate to get flood insurance.

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Chapter Summary